Page 171 - DMGT406_HUMAN_RESOURCE_MANAGEMENT

Human Resource Management

Notes Types of Incentive Plans

1. Individual Level Incentive Pay Plans: This is the most popular form of incentive pay plan.
In this type of plan, each person's output or performance is measured and the rewards the
person receives are based upon this measurement. Clearly, this is the type of incentive
pay plan most likely to establish a clear performance-reward relationship in the mind of
the employee. The purpose of the plan is to increase the pace of work or the effort the
individual is willing to contribute in order to receive higher rewards. The classic example
of this type of plan is a piecework system, wherein the employee is paid a set amount for
each unit of production. The organization expects to receive more output than it would if
the employee were paid under a time-based system. In addition, the organization can
easily track the labour cost associated with each unit of output.
One assumption of these plans is that the employee is an independent operator, that he or
she alone can carry out all the activities required to achieve the performance measure. In
this way, performance is a function of the employee's effort. The performance standard
must be clearly defined and measurable if such a plan is to be useful. Also, the job must be
relatively stable: the output required from the job should be consistent, and the inputs to
the job should arrive in such a way that the employee can work continuously.
2. Group Level Incentive Pay Plans: Where it is impossible to relate output to an individual
employee's efforts it may be possible to relate it to the efforts of the work group. If, in
addition, cooperation is required to produce the desired output, then a group incentive
plan may be the best alternative. Interdependence of work, then, is a major reason for
choosing a group plan over an individual one. A group incentive plan can reward things
that are very different from what an individual plan rewards, in particular: cooperation,
teamwork, and coordination of activities. Where these are highly valued, a group plan is
the most appropriate. As organizations become more complex and the production process
more continuous, group incentive pay plans can be expected to become more popular.
Group plans are also useful where performance standards and measures cannot be defined
objectively. In a group setting, variations tend to average out, so no one gets as hurt by
random variation or lack of continuity. Almost any individual plan can be adapted to a
group setting. Thus the focus in group plans is still higher level of effort.

The primary disadvantage of the group plan is that it weakens the relationship between
the individual's effort and performance. Where there is likely to be wide variation in the
efforts of group members, a group incentive may lead to more intragroup conflict than
cooperation. In group plans, it is also more difficult to monitor performance standards
and measures. Finally, group norms play an expanded role, both positive and negative, in
group plans. They are stronger and more controlling on the individual. Where the group
norms are congruent with management's goals, this is a plus; but where the two differ, it
can harm the chances of success of the incentive plan.
3. Plant and Organization-wide Incentive Pay Plans: Organization-wide plans are expanding
under the name of gainsharing.

Organization-wide plans differ significantly from individual plans by rewarding different
things. As indicated, most individual and group plans attempt to increase effort. Most
organization-wide plans, however, reward an increase in organization-wide outcomes
that directly affect the cost and/or profit picture of the organization. Usually, these plans
reward increases in productivity of the plant or organization as measured by reduction of
organizational costs, in comparison with some measured normal cost. Or they may reward
increased output with the same or fewer inputs.
A major feature of organization-wide incentive pay plans is a change in the relationship
between management on the one hand and employees on the other. Rather than the

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